Portugal patches up government to avert collapse

Portugal's Prime Minister Pedro Passos Coelho patched up his ruling coalition Friday to avert a potentially calamitous break-up in a row over austerity measures for the bailed-out nation.

Bond markets rallied in morning trade after the prime minister said he had found a "formula" to hold together the shaky coalition, led by his Social Democratic Party.

The yield on benchmark 10-year Portuguese government bonds fell to 6.971 percent, down from the critical 8.0 percent at the height of the political crisis mid-week.

The Lisbon stock exchange's key PSI-20 index was nearly flat -- easing just 0.21 percent to 5,420.23 points -- after surging 3.7 percent the previous day on signs of an emerging political fix.

Investors had feared a new wave of instability in the eurozone's debt-laden periphery, where anti-austerity sentiment is growing with no end in sight to high unemployment and recession.

Foreign Minister Paulo Portas, who is also leader of the junior partner in the governing coalition, the small conservative CDS-PP party, resigned on Tuesday a day after the shock departure of finance minister Vitor Gaspar.

But after two days of talks with his foreign minister, Passos Coelho met with President Anibal Cavaco Silva on Thursday and announced he had found a formula to assure the stability of his government.

The premier gave no details of the deal, saying it was subject to further negotiations.

"Whatever agreement they may reach, he will not gain the confidence of the country or the markets," the daily Diario de Noticias predicted in an editorial.

Portugal's president, who is being pressed by the opposition Socialists to dissolve parliament and call snap elections, has not commented on the latest development.

The political crisis erupted in a row over austerity policies imposed in exchange for a 78-billion-euro ($100-billion) bailout extended in May 2011 by its "troika" of creditors, the International Monetary Fund, European Commission and European Central Bank.

Portas, who wants a change in economic policy, objected to the premier's choice of new finance minister, Treasury Secretary Maria Luis Albuquerque, who was expected to pursue further austerity in defiance of mass protests.

Despite growing opposition to its tight-fisted policies, the government is now under pressure to present a further 4.7 million euros in spending cuts to the troika when its auditors visit Portugal on July 15.

The austerity measures have plunged Portugal into a deeper recession with higher unemployment than had been expected, sparking mass protests and strikes.

At the end of March the budget deficit amounted to 10.6 percent of annual output. The target set by creditors, already relaxed twice, is for a deficit of 5.5 percent at the end of the year.

The government expects the economy to contract by 2.3 percent by the end of the year, while the unemployment rate has soared to a record 18.2 percent.